What Are the Key Issues Going Into 2020?

The term ‘outlook’ can be misleading, as most forecasts tend to be partially to very off-base in hindsight. So, this question is best answered as a summary of whatever is currently top of mind going into the New Year. Some of these may change from year-to-year, while others have been ongoing.

Presidential impeachment proceedings

Now that this has escalated to a full trial in the Senate, expectations for an acquittal or lighter ‘censure’ appear the highest-probability outcome. Of course, anything that throws these expectations off track could affect financial markets, as would any implications for the upcoming Presidential race (see below). Despite all this, polls have shown Americans are relatively steadfast in their support one way or the other following the high-profile and contentious proceedings so far.

Trade between the U.S. and China

While ‘phase one’ of a deal has technically been agreed to, it remains under legal review and has yet to be finalized. While the process of achieving further agreement remains likely a long one, the hope is that further tariffs can be paused and/or coupled with an easing of existing restrictions. Following the various announcements, which financial markets have tended to view optimistically, follow-through is also an issue, as details have been vague and implementation has been spotty historically.

Trade between the U.S. and other countries

While the issues between the U.S. and China have taken most of the headlines, increasingly protectionist policies affect other relationships around the globe. This has been highlighted (and possibly solved) by the U.S.-Mexico-Canada trade agreement (USMCA) replacement for NAFTA, assuming final approval is just a formality. Also, there are a variety of other skirmishes with Europe, notably with France over their imposition of a ‘digital tax’, which affects a disproportionate number of U.S. tech firms, and was countered with a symbolic severe 100% tariff on items of French cultural significance, such as Champagne, cheese, etc. Other export-heavy nations, such as Germany (especially with autos and industrial equipment), are also sensitive to these protectionist pressures.

Presidential election

This is potentially volatility-inducing, based on polling results and sentiment. Politics aside, the key financial market issues here are: (1) a Republican administration (Trump) would retain the current pro-corporate policies, such as a low tax regime and reduced regulatory burdens; (2) a Democratic regime (especially Warren or Sanders) could raise fears of anti-competitive review of certain behemoth companies, such as in technology, attempt a rollback in tax cuts or reestablish a more restrictive regulatory environment. There are sector concerns here as well, which we’ve discussed previously. Overall, an incumbent president has a lot to lose by the economy going into recession just prior to an election—it’s almost a sure-fire formula for a regime change.

Economic growth/stage of the business cycle

How long will this already-long cycle continue? That is the key question and may continue to be so until we eventually have a recession. A decade of recovery since the financial crisis is already a record in the modern era (last 100+ years, at least), but we have experienced several mid-cycle slowdowns over that time (which can look like a recession is beginning, even when it doesn’t end up unfolding). Growth has been slow throughout, though, which has reduced the amount of ‘excess’ in the economy, and possibly, the damage from a recession, if one were to occur in the near-term.

Yields and Fed policy

The U.S. Federal Reserve has effectively announced that the three rate cuts in 2019 are it for the time being, the certainty about which the market seems to appreciate. However, the bar for raising rates has been raised, due to concerns over a lack of broad inflation. The Fed’s predictions for the future, though, similar to other economists, have shown mixed accuracy. Other central banks around the globe, such as the ECB and Bank of Japan, have remained steadfastly accommodative, keeping interest rates at negative levels, in addition to other stimuli, in response to very low inflation and economic growth. Looking at the long-term drivers of demographics/labor force growth and productivity, such meager conditions do not appear likely to abate soon.

Equity earnings and valuations

One concern is about U.S. markets, following a strong period of above-average absolute returns and relative outperformance over foreign equities—how long can it go on? Valuation has tended to be a poor predictor of near-term performance but can be useful in looking at upcoming multi-year performance. In this framework, a period of lower returns following a decade of high returns compared to historical norms wouldn’t be surprising. But markets continue to surprise in the meantime, so those who have moved to more defensive positioning too early can miss out on continued strength. Earnings growth has tended to be the primary driver of long-term equity results, however, which is a reason stocks often decline prior to recessions and perform well during periods of economic expansion. At the same time, the world has become more convoluted, with U.S. companies earning increasing amounts of revenue from abroad, and vice versa, so, aside from currency impacts, company domicile outright is less useful in broad brush equity market evaluations than in the past.

The wildcards

They are always there, whether it be geopolitical flare-ups, weather disasters, political regime changes, or other surprises. As always, portfolio diversification can help ease the volatility of these.

Author: Ryan Long

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